Unprecedented international economic sanctions targeting Russia following the country’s invasion of Ukraine have triggered a record devaluation of the ruble and driven Russian citizens to queue up at banks and ATMs in hopes of drawing out cash amid the financial turmoil.
Fallout from the conflict is likely to have rippling global impacts as well, including further cost increases on some goods in a U.S. economy already experiencing record, inflation-driven price escalations.
And, some Utah companies that rely on open access to Russian and Ukrainian customers or engage service providers in those countries are working to navigate challenges amid the crisis.
Miles Hansen is president/CEO of World Trade Center Utah and also previously served for years in various State Department postings including in the former Soviet republic of Armenia.
“We have several Utah consumer product companies that have significant sales in Russia and at least one with double digit percentages there,” Hansen said. “UPS and FedEx have said they will stop shipments to and from Russia and it’s pushing these companies to figure out how to adapt their business.”
A number of Utah technology businesses utilize developers in both Russia and Ukraine and other local firms that had expansions into the area planned are reconfiguring in the face of the sanctions and uncertainty, he said.
Hansen said he expected sanctions on Russian exports would have the biggest impacts on consumer energy prices, including at gasoline pumps, but could also edge into other sectors that rely on raw materials or agricultural products produced in the country.
Russian currency plunged about 30% against the U.S. dollar after Western nations announced moves to block some Russian banks from the SWIFT international transaction messaging system and to restrict Russia’s use of its massive foreign currency reserves. The exchange rate later recovered ground after action taken by Russia’s central bank.
But the economic squeeze got tighter when the U.S. announced more sanctions later Monday to immobilize any assets of the Russian central bank in the United States or held by Americans. The Biden administration estimated that the move could impact “hundreds of billions of dollars” of Russian funding.
Hansen said it appears the U.S. and other western nations were acting on lessons learned from previous Russia-targeted sanctions in 2008, when the country invaded Georgia and again in 2014, following the Russian annexation of Crimea. While those efforts reportedly led to Russian economic losses measuring in the hundreds of billions of dollars, Hansen noted the strategies ultimately did little to deter the expansionist plans of Russian President Vladimir Putin.
This time around, Hansen said, the U.S. and global response so far has been ratcheting up significantly over past efforts.
Biden administration officials said Germany, France, the U.K., Italy, Japan, European Union and others will join the U.S. in targeting the Russian central bank and freezing movement of over $600 billion in Russian foreign currency assets.
Tyler Kustra, an assistant professor of politics and international relations at the University of Nottingham, said he couldn’t recall a similar example from the past of an economy brought to its knees by global sanctions.
“This is the West causing a currency crisis for Russia,” said Kustra, who studies economic sanctions.
Russians, wary that sanctions would deal a crippling blow to the economy, have been flocking to banks and ATMs for days, with reports in social media of long lines and machines running out. People in some central European countries also rushed to pull money from subsidiaries of Russia’s state-owned Sberbank after it was hit with international sanctions.
Moscow’s department of public transport warned city residents over the weekend that they might experience problems with using Apple Pay, Google Pay and Samsung Pay to pay fares because VTB, one of the Russian banks facing sanctions, handles card payments in Moscow’s metro, buses and trams.
A sharp devaluation of the ruble would mean a drop in the standard of living for the average Russian, economists and analysts said. Russians are still reliant on a multitude of imported goods and the prices for those items are likely to skyrocket, such as iPhones and PlayStations. Foreign travel would become more expensive as their rubles buy less currency abroad. And the deeper economic turmoil will come in the coming weeks if price shocks and supply chain issues cause Russian factories to shut down due to lower demand.
“It’s going to ripple through their economy really fast,” said David Feldman, a professor of economics at William & Mary in Virginia. “Anything that is imported is going to see the local cost in currency surge. The only way to stop it will be heavy subsidization.”
Russia has moved to produce many goods domestically, including most of its food, to shield the economy from sanctions, Kustra said. He expected that some fruits, for example, that can’t be grown in Russia “are going to be suddenly much more expensive.”
Electronics will be a pain point, with computers and cellphones needing to be imported and the cost going up, Kustra said. Even foreign services like Netflix might cost more, though such a company could lower its prices so Russians could still afford it.
In a weekend story for The Atlantic, David Frum wrote that countries cut off from SWIFT, as Iran was in 2012, are effectively cast back into the pre-computer era — forced to rely on primitive barter transactions, or “Breaking Bad”-style pallets of physical cash, to fund their governments and their economies.
While Russia owns some $630 billion in foreign currency reserves, Frum noted the country doesn’t have control of large portions of those funds. That responsibility falls on foreign central banks, especially the U.S. Federal Reserve and European Central Bank, that can effectively cut Russia off from access to the funds under the umbrella of international sanctions.
Frum wrote that the Federal Reserve or European Central bank could say, “Nope. Sorry. The Russian central bank’s money is frozen. No transfers of dollars or euros from the Russian central bank to commercial banks. No transfers from commercial banks to businesses or individuals. For all practical purposes, you’re broke.”
It would be a startling action, but not unprecedented. The United States did it to Iran after the revolutionary regime seized U.S. diplomats as hostages in 1979.
The Russian government will have to step in to support declining industries, but without access to hard currencies like the U.S. dollar or euro, banks and economic sectors may have to resort to printing more rubles. It’s a move that could quickly spiral into hyperinflation.
Kremlin spokesman Dmitry Peskov described the sanctions that included a freeze on Russia’s hard currency reserves as “heavy,” but argued Monday that “Russia has the necessary potential to compensate the damage.”
The steps taken to support the ruble are themselves painful because raising interest rates can hold back growth by making it more expensive for companies to get credit. Russians who have borrowed money, such as homeowners with mortgages or business owners who have taken out loans, could also get hit by the central bank’s decision to double interest rates, Kustra said.
Contributing: Associated Press